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April 9, 2014

Fed Minutes Ease Concern on Rate Rise, Lifting Stocks

Several Fed policy makers said a rise in their median projection for the main interest rate exaggerated the likely speed of tightening

Traders on the floor of the NYSE. (Photo: AP)

U.S. stocks rallied, with technology shares gaining the most in two months, as minutes from the Federal Reserve’s last meeting eased concern about the timing of future interest-rate increases.

Alcoa Inc. (AA) advanced 3.8 percent after earnings topped estimates and the company forecast that global demand for aluminum will exceed production this year. Facebook Inc. climbed 7.3 percent, the most in the Standard & Poor’s 500 Index, helping to extend a rebound in technology stocks after a selloff. Regeneron Pharmaceuticals Inc. surged 6.9 percent as shares of biotechnology companies rallied the most in a year.

The S&P 500 gained 1.1 percent to 1,872.18 at 4 p.m. in New York, after the gauge yesterday snapped a three-day slide. The Nasdaq 100 Index climbed 1.8 percent, the most since Feb. 7, after a 0.9 percent advance yesterday. The Dow Jones Industrial Average increased 181.04 points, or 1.1 percent, to 16,437.18. About 6.3 billion shares changed hands on U.S. exchanges, 9 percent lower than the three-month average.

“These minutes are calming for the markets,” Jeffrey Kleintop, chief market strategist at LPL Financial LLC, which manages about $414 billion, said by phone from Boston. “It was clearly stated that the projections overstated the likely shift in rates. A slower pace of interest rates seems more likely here than from the statements.”

Several Fed policy makers said a rise in their median projection for the main interest rate exaggerated the likely speed of tightening, according to minutes of their March 18-19 meeting released today.

Six Months

Treasury yields rose last month after policy makers predicted that the benchmark interest rate would rise faster than previously forecast. Janet Yellen, presiding over her first meeting as chair, later downplayed the importance of the forecasts, even as she said that rates might start to rise “around six months” after the Fed ends its bond-purchase program.

The Fed reduced the monthly pace of purchases by $10 billion, to $55 billion, and repeated it is likely to continue paring the program in “further measured steps.” Three rounds of bond purchases from the Fed have helped fuel economic growth, sending the S&P 500 surging as much as 180 percent from its 2009 low.

Data last week boosted optimism that the economy is shaking off the effects of severe winter weather and building momentum into the second quarter. The government’s jobs report on April 4 showed employers boosted payrolls last month and the unemployment rate held at 6.7 percent.

Earnings Season

The S&P 500 rose 0.4 percent yesterday and the Nasdaq 100 rebounded from its worst three-day drop since 2011 as technology shares rallied after a selloff. The S&P 500 fell as much as 2.4 percent from a record high reached April 2 amid concern about valuations in technology stocks.

Stocks rallied before the Fed minutes today as technology stocks continued to recover and Alcoa’s results boosted optimism at the start of earnings season.

Investors will be watching financial reports for signs of how well corporations weathered the first quarter. Profit for members of the S&P 500 probably climbed 1 percent in the first quarter, analysts now forecast, after anticipating a 6.6 percent rise in January. Their sales climbed 2.9 percent, the projections show.

Alcoa, the first company in the S&P 500 to report results for the quarter, climbed 3.8 percent to $13. The largest U.S. aluminum producer posted profit excluding restructuring costs and other items that beat analysts’ estimates.

Aluminum Demand

The company also forecast global aluminum demand will exceed production this year, predicting an end to an almost decade-long surplus driven by Chinese output that has saddled the industry with lower prices.

JPMorgan Chase & Co. and Wells Fargo & Co. are among the S&P 500 companies that report their earnings on Friday.

“We’ve been in this pre-earnings information void and now we’re going to have a threshold and we’ll see which companies will continue to grow and which won’t,” Dan Veru, chief investment officer who helps oversee $5 billion at Palisade Capital Management LLC, said by phone. “This is the year of individual stock-picking. That’s what will drive returns.”

The Chicago Board Options Exchange Volatility Index, a gauge for U.S. stock volatility known as the VIX, retreated 7.2 percent to 13.82 today. The index has fallen 11 percent since closing at a three-week high on April 7.

“These pops happen to be in sectors like tech and consumer-discretionary, very cyclical areas of the markets,” LPL Financial’s Kleintop said. “The idea is that if the Fed is slower to raise interest rates, it is good news for more cyclical areas of the market. These companies are very levered to how fast the economy grows.”

Facebook jumped 7.3 percent, its largest gain since Jan. 30, to $62.41. The shares have rallied 10 percent in three days. The social-networking company slipped as much as 21 percent from a record $72.03 on March 10.

LinkedIn Corp., which trades at more than 760 times reported earnings, increased 4.2 percent to $176.18. The company jumped 5.9 percent yesterday, after falling in five of the previous six sessions. Twitter Inc. added 1.7 percent to $42.49, its first gain in six days, and Yahoo! Inc. rose 3.1 percent to $34.87.

Biotechnology Gains

The Nasdaq Biotechnology Index climbed 4.1 percent, the most in a year. The gauge fell as much as 17 percent after reaching an all-time high on Feb. 25. Regeneron surged 6.9 percent to $306.26. The drugmaker, which trades at 80 times reported earnings, slid 18 percent after the shares closed at a record on Feb. 24.

Merck & Co. soared 3.7 percent to $57.10 to lead gains in the Dow. Industrial shares jumped 1.3 percent as a group, paced by a rally in airlines. The Bloomberg U.S. Airlines Index surged 3.1 percent as Delta Air Lines Inc. added 3.6 percent to $34.73. Boeing Co. climbed 2.2 percent to $126.88.

U.S. stocks will rally further as the doubling of the S&P 500 from its 2009 low has yet to stretch valuations, according to Holland & Co.

Valuations have not risen to levels that threaten an imminent correction, even though equities trade at a higher price-to-earnings ratio than they did five years ago, Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York, told Tom Keene and Scarlet Fu on Bloomberg Surveillance.

‘Significant Legs’

“This is not a bear market,” Holland said. “The bull market still has some significant legs to it before this is over. We had valuations that were screamingly attractive five years ago. Fast forward to today, they are reasonably valued. These things normally don’t end until we get overvalued and we’re not there yet.”

The bull market has pushed the benchmark to 16 times estimated earnings from a low of 11 in October 2011, according to data compiled by Bloomberg. The index’s average multiple in the last five years was 14.3.

Investors have added $8.1 billion to U.S. equity exchange-traded funds in the past five days and added $189.9 million to American bond ETFs, data compiled by Bloomberg show. Consumer staples stocks absorbed the most money among industry ETFs, taking in $401.5 million during the past week. Technology ETFs lost $1.5 billion in the past five days, the most of any sector in that period.

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